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Technology Stocks : Vitesse Semiconductor -- Ignore unavailable to you. Want to Upgrade?

To: MoonBrother who wrote (1924)	10/16/1998 8:40:00 AM
From: MoonBrother	Read Replies (2) \| Respond to of 4710

Part 2 and 3 --------------- 08:21am EDT 16-Oct-98 CIBC Oppenheimer (Dale R. Pfau 415-434-5871) VTSS VTSS: Great Quarter; Strong Growth to Continue P2-3 Part 2 of 3 manufacturers such as Solectron for products that are ultimately delivered to a number of datacom OEMs.. New Devices introduced in the quarter VSC7211 Single Channel Gigabit Interconnect IC VSC7214 Quad Channel Gigabit Interconnect IC Telecom Products for OC-48 continue to dominate this segment. Although the company has a number of design wins and products for OC-192, revenues from these products continue to be small. We continue to see very d robust demand for SONET/SDH applications, in particular OC-48 WDM. Because Vitesse continues to gain market share, improve customer penetration, and increase device performance and ASP, we believe that the growth rate in this sector will continue to surprise the skeptics. We continue to maintain that Vitesse has no viable competitors and we expect that the company will maintain a 65% to 70% growth rate in the telecommunications sector. This gives us a target revenue range for telecommunications of $210 million to $$220 million in FY1999 New Devices introduced in the quarter. V-Frame 2.5/ATM 3.3V Chipset VSC9110 2.5Gb/s ATM UNI IC VSC8163 16:1 2.5Gb/s ATM MUX IC VSC8164 1:16 2.5Gb/s ATM MUX IC VSC8113 155/622Mb/s SONET/SDH PHY Transceiver VSC8114 622 Mb/s SONET/SDH PHY Transceiver V-Drive 2.5 Laser Driver Family VSC7923 VSC7924 VSC7926 VSC7927 VSC7934 VSC7937 VSC8120 2.5 Gb/s Clock Recovery Unit VSC8121 2.5 Gb/s Clock Multiplication Unit Test Equipment The test equipment segment has seen strong growth over the past year and its surprising strength has confounded investors who have expected this segment to suffer along with the industry. We believe that the company is virtually sole-source on a number of complex parts that have just begun production live cycles or will soon enter production life cycles. We do not however, expect the company to show the same growth in this sector. We believe that the company will grow revenues in this sector to $55 to $60 million in FY1999. Both Schlumberger and Teradyne continue to be the main customers of Vitesse in this application segment. The Test Equipment end market for Vitesse product is split as follows: 60% for Logic/Microprocessor testers; 15% for Mixed Signal testers and 25% for Memory testers. The majority of the Memory testers is for testing RAMBUS compliant memory devices and require 400-600 MHz of channel capacity. New Devices VSC6048 200 MHz Timing Vernier IC A Hint of Things to Come Vitesse has sampled during the quarter a new next generation 64x65 switch technology to an Alpha site partner which it is currently working on next generation switch architecture. The traditional architecture has been to parallel CMOS RAM based switch technology which can deliver throughputs of 75-150 Mb/port. This new switch technology will allow for throughput of 2.5 Gb/port. This switch is targeted for the highend telecom/datacom applications and we believe that production for this product may begin during the second half of 1999. Over the next three to four months, we believe that Vitesse will introduce a 16x16, 32x32 and 64x64 to fill in the product family for these switches. The company is already producing a 2x2 product. We believe that this may be a significant paradigm shift in switch architecture that may be extremely significant beyond the year 2000. If successful, this could be a very significant revenue product. CMOS Products The company is introducing and sampling new highly integrated CMOS products to address the non-PHY layer SONET, ATM and Gigabit Ethernet markets. We do not believe that these CMOS products will generate substantial revenues in the 1999 fiscal year but will strategically position the company to generate substantial revenues in the 2000 fiscal year. Approximately 30% of the engineering design staff is allocated to CMOS products. Customers The top customers for Vitesse continue to be Lucent (23%) and Schlumberger (11%) with LM Ericsson, Teradyne, and Alcatel comprising between 3-7% of revenues each. We believe that the top twenty five customers account for between 75-80% of total revenues for the company. Cash position continues to improve The cash balance increased to $162.3 million from $156 million in the prior quarter. DSOs were in the mid 60's , comparable to the prior quarter and inventory turns reached 5X for the quarter. Capital expenditures were $30 million for the fiscal year. Head count increased to 590 from 443 and the end of fiscal 1997. Gross Margins Continue to Improve We believe that gross margins could continue to improve by 0.5% for each 10% increase of revenues. Gross margins during the quarter reached 61.2%, slightly better than our estimate of 61%. Gross margins will continue to improve as factory utilization improves and the yields continue to improve. Exhibit 5. Vitesse Gross Margin Model Source: Company Data Raising Estimates Based upon the continued strong operational performance of the company and the strong bookings outlook, we are again raising our estimates for the company. By assuming that the company will grow revenues by 10% each quarter during the next fiscal year, and that gross margins will improve .5% each quarter, our new model yields a net income of $0.83 per share on revenues of $276 million. This compares with our prior estimate of $0.81 per share on revenues of $262 million. We note that the tax rate for fiscal 1999 is 35% compared to a tax rate of 20% in FY1998. For FY2000 our new estimate is $1.25 per share on revenues of $417 million compared with our prior estimate of $1.19 on revenues of $395 million. Valuation Based upon a conservative 35x multiple (earnings growth rate is 50%) on a calendarized 2000 estimate of $1.38 we continue to maintain our target price of $45 to $50 per share over the next twelve to eighteen months. Our quarterly EPS estimates are shown below. 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Year FY 1998 Prior $0.14A $0.16A $0.18A $0.20E $0.65E FY 1998 Actual $0.14 $0.16 $0.18 $0.21 $0.67 08:22am EDT 16-Oct-98 CIBC Oppenheimer (Dale R. Pfau 415-434-5871) VTSS VTSS: Great Quarter; Strong Growth to Continue P3-3 Part 3 of 3 FY 1999E Prior --- --- --- --- $0.81E FY 1999E Current $0.18E $0.20E $0.22E $0.24E $0.83E FY 2000E Prior --- --- --- --- $1.19E FY 2000E Current --- --- --- --- $1.25E Stock Prices (as of 10/15/98) of companies mentioned in this report: Alacatel (ALA-NYSE $20 7/8, not rated) LM Ericsson (ERICY-OTC $23 1/16, Buy) Lucent Technologies (LU-NYSE $70 13/16, Buy) RAMBUS (RMBS-OTC $61 1/2, not rated) Schlumberger (SLB-NYSE $47 1/8, not rated) Solectron (SLR-NYSE $50 1/2, Hold) Teradyne Inc.(TER-NYSE $23 3/4, not rated) CIBC Oppenheimer Corp., or one of its affiliated companies, makes a market in the securities of LM Ericsson, Rambus Inc. Exhibit 6. Vitesse Interim Operating Results Exhibit 7. Vitesse Earnings Model Source: Company Data, CIBC Oppenheimer Corp. Estimates Exhibit 8.Vitesse Balance Sheet